Richard C. Longworth, senior fellow at The Chicago Council on Global Affairs, contributes his knowledge and ideas about issues that affect the Midwest.

Monday, August 04, 2014

Everybody knows the problems with Midwestern manufacturing – the shift to the Sun Belt, followed by outsourcing and now, the technology revolution. These woes don’t need detailing because, when we think of manufacturing in the Heartland, it’s what comes immediately to mind.

Which is why it’s useful to remind ourselves that manufacturing in much of the Midwest is alive, well and growing. The fact is that the old industrial belt both produces and exports more manufactured goods than it ever did.

This doesn’t mean that manufacturing will ever again generate the mass employment that it did in the bygone days of assembly lines and blast furnaces. It still accounts for a lot of good jobs, but will never again be the basis of a middle-class economy, as it was in Chicago and so many other Midwestern cities in the post-World War II years.

Manufacturing, in fact, looks a lot today like farming. Once upon a time, agriculture underpinned the Midwestern economy and employed half or more of all Midwesterners. Farming is still vital to the region’s economy: the income, especially from food exports, is huge. But the industry employs barely two percent of the region’s population.

Ditto for manufacturing. Over the years, Midwesterners emigrated from farms to the factory jobs of the cities. Industry employed 35 or 40 percent of all Midwesterners. It’s still vital to our economy, especially in the exports it sends to the world. But it employs only nine percent of Midwestern workers, a figure that has been falling for years.

Much of this was the gist of a paper called “Revival in the Heartland: Manufacturing and Trade in Chicago,” that I wrote the HSBC, the international banking group which has sponsored a series of papers around the country on the role that trade plays in the American economy. With the help of Phil Levy, a colleague and senior fellow at The Chicago Council, I argued that manufacturing is still crucial to our regional economy and deserves all the help it can get.

But important as it is, “manufacturing in Chicago is an old heavyweight slugger, punching below its weight,” the paper said. It produces and exports a lot but could produce and export much more. The report focused on Chicago, but the same holds true for manufacturing across the Midwest.

The paper reported that manufacturing accounts for $53.9 billion of the Chicago region’s gross product, making it the second leading industry (after social services). Illinois exported $63.2 billion in 2012 – the figure undoubtedly is higher now – and manufactured goods account for 90 percent of those exports.

Manufacturing jobs pay $6.4 billion total to Chicago-region workers. These are both high-skilled jobs in factories and logistics and, increasingly, the very high-wage jobs in business services – law, accounting, consulting and the like. Chicago is a global center of manufacturing expertise and these services export their knowledge to the rest of the world.

But the report and a front-page article about it in the Chicago Tribune, stressed that the region could do better.

One problem is the litany of reports from academia and the media on the decline of manufacturing jobs. These reports gave the impression that manufacturing was dying, leading policy-makers to put support for manufacturing on the back burner and to focus attention on other more likely sources of jobs.

Another is the lack of cooperation between Midwestern states, all of whom rose together on the manufacturing boom of the industrial age, and declined together when the end of that age cut into factory employment. All these states share an interest in promoting Midwestern manufacturing, but they spend most of their time instead trying to steal businesses from each other.

A key example is the lack of cooperation between Midwestern states on the single most important factor in their export prowess, which is the state of transport and logistics through Chicago. Through its history, the city’s location has made it a crossroads for trade, starting with overland convoys from the East and building over the centuries, as it became a center for highways, trains and planes. The condition of this hub is crucial for all Midwestern states and their exporters.

Yet very little has been done to untangle the snarl of rail lines and highways that bring so much transcontinental freight traffic to a crawl as it crosses Chicago. A recent report by the Organization for Economic Cooperation and Development (OECD) noted that Illinois and the surrounding states do little to coordinate train traffic through Chicago, to their mutual harm.

There are signs, though, that manufacturing is getting the public attention it needs.

First is the boom in shale oil and natural gas, much of it produced in the Midwest, slashing energy costs for manufacturers. Second is the reshoring of some industry from overseas: much of this manufacturing is highly automated, though, so it’s expanding the capacity of industry without creating many jobs.

Third is the new emphasis on so-called advanced industry. Too often, this is equated with space-age products such as smart phones that do more for output in Silicon Valley than in the Midwest. But Midwestern experts note that advanced industry has more to do with processes than products: the Midwest still makes many of the same old products, such as steel and earthmovers, but does it with highly advanced techniques and processes that make the region a center for advanced industry.

The federal government’s decision to locate three of its advanced industrial laboratories in Chicago, Detroit and Youngstown embraces this new thinking.

The laboratories will also underline the most important thing about manufacturing – its ability to spur innovation. From the steam engine to 3-D printing, most of the important innovations in the modern economy have spun off manufacturing. That won’t stop. To the degree that the Midwest keeps its manufacturing base strong, it still has an economic future.

Friday, July 25, 2014

Whether booming or busting, no two cities are alike. But each has something to learn from others, especially in the brutal post-industrial competition ushered in by the age of globalization.

Nobody is doing a better job of comparing cities in the Midwest than the Federal Reserve Bank of Chicago. We’ve written earlier about the Industrial Cities Initiative, a comparison of the differing destinies of ten mid-size industrial cities across the Fed’s five-state area. Now Rick Mattoon, the first-rate senior economist and economic advisor in the Chicago Fed’s Economic Research Department, has compared aspects of the largest cities in each of the five states.

The first installment, focused on Des Moines, appears in the blog hosted by Bill Testa, the Chicago Fed’s vice president for regional programs and itself an invaluable source of information on the Midwestern economy. The five-city report, co-authored by Mattoon and Norman Wang, a former associate economist at the Fed, can be accessed here.

The big five cities are Chicago, Detroit, Milwaukee, Indianapolis and Des Moines. These are five very different cities, both past and present. Mattoon doesn’t aim to give a complete picture of any of them. Instead he zeroes in on their “clusters” – the degree to which they are dominated by a few industries (such as autos in Detroit) or have a broad range of major industries, as do Chicago and Indianapolis. In the process, he tests the argument by Michael Porter, the Harvard economic theorist, that clusters are the key to urban economic growth.

Armed with this information, Mattoon looks at each city’s economic development plan and finds that they mostly are focused on clusters – although not necessarily the clusters that sustained them in the past.

This sort of comparative work is so valuable that I wish the Fed – not just the Chicago Fed but the nation’s 11 other Federal Reserve Banks – would collaborate to do more of it. It would be interesting to see Mattoon’s assessment of the five cities in the Chicago’s Fed’s region compared with, say, Minneapolis or Omaha or Columbus or Kansas City. All are Midwestern cities that share a history and economy with the cities in Mattoon’s report. But they are parceled out among other Fed districts that cooperate too seldom in analyzing problems that afflict them all.

Wednesday, July 16, 2014

Few politicians have seen their reputations dive so far and so fast as Richard M. Daley, the former mayor of Chicago and the symbol of what’s great and what’s grim about the city he ruled for 22 years.

Daley is in the news right now because of the 10th anniversary of his greatest achievement, Millennium Park, the splendid lakefront spread that crowned the city’s rebirth from the depths of its Rust Belt squalor.

Millennium Park sparkles, no question about it. It’s a huge tourist draw. It’s given the city a central meeting place, Chicago’s own Tuileries. It’s a dazzling assembly of sculpture, art, fountains, music, gardens, fun, and culture. It also ran way over budget, created debts that the city is still paying, and included allegedly corrupt sweetheart deals that may yet land Daley in court.

In a way, Millennium Park sums up much of Daley’s reign, the longest in the city’s history.

He achieved much. The Loop revived. Tourism soared. Middle-class families and young people moved back into the city in droves. Navy Pier was renovated and became the city’s biggest tourist draw, even bigger than Millennium Park. Flowers bloomed along the city streets. A coalition of businesses and City Hall ran the city, and got things done.

Mostly, Daley understood that his old factory town was evolving into a global city, and sped the process, seeking foreign investment, supporting the city’s universities, even traveling to China and other foreign points to give Chicago a new global reputation to replace the old stereotype of a gang-ridden City of the Big Shoulders.

The Economist magazine anointed Chicago as a “success story.” Daley was hailed as one of the world’s most effective mayors. Around the Midwest, I got used to hearing officials in other clapped-out industrial cities say they couldn’t compete with Chicago “because you’ve got Richie Daley.”

All this is true. So is the downside of the Daley era, much of it broadcast by his critics during the tenure but only now becoming part of the general public assessment of post-Daley Chicago. Much of it isn’t pretty.

Again, Millennium Park is symbolic. Daley had promised it wouldn’t cost taxpayers a cent. By the time it opened, four years later and hugely over budget, the park cost taxpayers $95 million, plus $30 million to run it, plus $58 million for the lease of its parking garages, which were supposed to have helped pay the bill.

That’s just a starter. Chicago faces an annual structural deficit of $1.2 billion, including payments on under-funded pensions, the worst in the nation: Chicago isn’t Detroit but budget-watchers here are talking seriously about the possibility of civic bankruptcy.

Daley’s successor, Rahm Emanuel, faces the worst budget crisis of any major city, except Detroit, and knows he has to both slash services and increase income – possibly through higher property taxes – to begin to balance the books. The crisis, plus Emanuel’s abrasive personality, have eroded his popularity to the point that it will be hard for him to do what needs to be done and still win re-election next year.

The good and the bad – the global stature and the crushing debt – go together. Being a global city is expensive. The city needs to spend big money on infrastructure, transport, schools, especially policing. But because of the Daley debt, the money isn’t there.

Other chickens are roosting. Chicago remains one of America’s most segregated cities, a problem that Daley inherited but failed to solve. As a result, one-third of Chicago, including the businesses that Daley supported, occupy a booming global city, while many African-Americans and Hispanics live in a third world ghetto, stripped of jobs and battered by the resultant violence that is giving the city a new title – America’s murder capital.

In an attempt to draw middle-class families into Chicago, Daley persuaded the state to give him control over the city’s schools. The result has been a true improvement in public schools, including charter schools, in better neighborhoods, and the decline of many schools in black neighborhoods into dropout factories. Chicago, always a divided city, became more so in Daley’s time.

But debt and deficit remain the legacy that Daley’s critics most often cite. Two examples stand out:

In 2007, as part of his misbegotten bid for the 2016 Olympics, Daley bought a decade of labor peace with a lavish 10-year contract with public employee unions. The city didn’t get the Olympics but it must live with this contract for another two years.

Most egregiously, Daley leased the city’s parking meter system to a private firm for 75 years for a total upfront payment of $1.16 billion. The complex contract was rammed through his rubber-stamp city council in two days, guaranteeing that no alderman even read it, much less understood it. The money was gone in three years, used to pay the city’s bills. It’s clear that the city got a stupendously bad deal. Emanuel has tried to break or modify the contract, with very little luck.

A big children’s park, named after Daley’s late wife Maggie, is being built next to Millennium Park. Experts who’ve seen the plans say it looks first-rate, but another expensive project bearing the Daley name is unlikely to help the former mayor’s reputation.

Since he left office two years ago, Daley has largely dropped out of sight. Emanuel almost never refers to him by name. Daley is a fellow at the University of Chicago’s Harris School and is chairman of a Brookings Institution project on global cities, but keeps a low profile in both roles.

As mayor, Daley presided over a culture of casual civic corruption but there is no evidence he enriched himself in office. Now, though, he is making money as a Coca-Cola director, an advisor to JP Morgan Chase and as Of Counsel to the law firm of Katten Muchin Rosenman. It’s escaped nobody’s notice that Katten Muchin negotiated the disastrous parking meter deal.

So far, Daley has stayed out of court himself, even as a witness. At the moment, his lawyers are arguing that unexplained health problems will keep him from testifying in a city lawsuit involving a clout-heavy deal for a restaurant in Millennium Park. The suit alleges that Daley’s administration – specifically the city’s Park District – gave the sweetheart lease on the Park Grill to a firm headed by one Matthew O’Malley. O’Malley was the lover of a Park District official, Laura Foxgrover, who gave birth to O’Malley’s baby while the negotiations were going on.

In a deposition, Daley said he didn’t remember much of this. Lawyers would love to get him on the stand. Daley isn’t charged with anything, but he is fighting to stay off the stand, perhaps all too aware that what’s left of his reputation could be gone by the time his testimony ends.

Tuesday, June 17, 2014

The world, and the Midwestern part of it, are on their own for the next three weeks. The Midwesterner is taking a mid-summer break, and will be back in mid-July. We leave town with a wish that sunny skies and balmy breezes soothe these days for all of you.

Thursday, June 12, 2014

Last week we reviewed the work of Thomas Piketty, the French economist whose surprise blockbuster, Capital in the 21st Century, charts a growing inequality, especially in the United States. According to Piketty, this inequality is caused mostly by the mega-salaries paid to CEOs and financial moguls and by the concentration of wealth and capital in the upper 1 percent.

But inequality has two engines—not only growing wealth at the top but falling wealth everywhere else, and the bulging gap between them. Piketty argued that the rich are getting richer, but he didn’t have much to say about the rest, except by inference, which we’ll discuss later in this blog.

Some new studies have tackled this problem of the left-behinds. Much of what they have to say will ring true for Midwesterners and other Americans, especially young people seeking a toehold in the new economy.

Thursday, June 05, 2014

Thomas Piketty is a problem. If the best-selling French economist has got it right, much of what we thought we knew about economy and society—about how the world really works—is wrong. For instance:

A rising tide doesn’t lift all boats.

Inequality in wealth and income is the norm, not an aberration.

A properly-run market economy is an engine for inequality and unfairness.

It’s going to get worse, unless government does something about it.

This isn’t the economic theory that most of us learned in school, and that still dominates most academic thinking and government policy. No wonder the attacks have already begun on Piketty’s book, Capital in the Twenty-First Century. These attacks, too, will get worse. So far, Piketty seems to be weathering them well.

Tuesday, May 20, 2014

More than any region, the Midwest lavishes seven-figure pay packages on the presidents of its big public universities. At the same time, too many of these universities are trimming full-time faculty while their students run up some of the biggest student loan debt in the nation.

It’s time to ask whether students at the Midwest’s flagship schools are getting their money’s worth.

All this comes from the list of executive compensation at public colleges published annually by The Chronicle Of Higher Education, and a new paper, “The One Percent at State U,” issued by a progressive Washington think tank, the Institute for Policy Studies (IPS).

The Chronicle listing showed that nine presidents of public universities netted more than $1 million in total compensation in 2012-13, and that five of them led Midwestern institutions.

All by himself at the top was E. Gordon Gee, the gaffe-prone and free-spending president of Ohio State, with total compensation of $6,057,615, with a base pay of $851,303 and the rest in perks, including deferred compensation. Gee’s total was more than 12 times the median compensation for public university presidents nationwide.

Hamid A. Shirvani, president of the South Dakota University system, ranked third at $1,311,095. Sally Mason, the president of the University of Iowa, was fifth, with $1,139,705, Michael A. McRobbie of Indiana University was sixth at $1,111,924, and Mary Sue Coleman at the University of Michigan was ninth with $1,037,357.

Apparently, money can’t buy contentment. Both Gee and Shirvani have since quit their jobs, as has the second-biggest earner, R. Bowen Loftin, who left his $1.6 million post at Texas A&M for a new post at yet another Midwestern flagship university, Missouri.

The presidents of the University of Houston, the University of Georgia, the University of South Alabama, and the University of California system rounded out the list of top 10 earners.

University trustees who sign off on these salaries usually say they’re necessary to get top leaders, or to keep their presidents from going to other campuses. Neither is true. Gee, Shrivani, and Loftin decamped, despite their lofty salaries. And the presidents of Wisconsin and North Carolina, both first-rate schools, earn less than $500,000 in total compensation. Robert Easter, the highly-respected president of the University of Illinois, not only earns $450,000 but agreed to a package that was about $200,000 below that of his predecessor.

None of the top-paying schools may be a diploma mill, but except for Michigan and California, few stand at the pinnacle of American higher education. Most are better known for their football teams than their research.

This comparison between athletics and scholarship isn’t incidental. Most of these schools reserve their really big paydays for coaches. At Ohio State, for instance, the base salaries for football coach Urban Meyer ($4.6 million) and basketball coach Thad Matta ($3.2 million) leave Gee, with his measly $851,000, looking like a street person.

(Gee apparently was popular at Ohio State, although from outside it’s hard to see why. Over the years, he and his wife were regularly criticized for lavish personal spending, and Gee himself specialized in bad jokes that insulted, among others, Poland, Catholics, and the Little Sisters of the Poor. He usually apologized, although it took him six months to say “I’m sorry” to the Catholics.)

As noted, these big paychecks would be easier to justify if they reflected academic excellence. They also would be more acceptable if we knew that they weren’t eating into their schools’ real mission, which is to educate students. This may be in doubt.

The IPS study found a correlation between outsize presidential pay and the growth in student debt. In addition, these schools that paid big money at the top were more likely to cut back on full-time faculty and resort to underpaid adjunct teachers instead.

Again, the chief offenders were Midwestern—led by Ohio State, followed by Penn State, Minnesota, and Michigan.

One of the authors, Marjorie Wood, toldThe New York Times that high executive pay doesn’t necessarily lead directly to higher student debt or fewer faculty. “But if you think about it in terms of the allocation of resources, it does seem to be the tip of a very large iceberg, with universities that have top-heavy executive spending also having more adjuncts, more tuition increases, and more administrative spending.”

Specifically, the IPS found that:

The recession didn’t even slow up top executive pay. Average executive pay at all public research universities went up 14 percent from 2009 to 2012 but, at the 25 high-paying schools, it rose by a third.

At the same 25, student debt increased 13 percent faster than the national average.

At the top 25, the number of adjunct faculty rose more than twice as fast as the national average. At the same time, the number of permanent faculty in these schools rose only half as fast as the average.

The IPS report said that student debt at Ohio State rose 23 percent faster than the national average from 2010 to 2012. During the same period, it said, Ohio State hired 670 new administrators, 498 adjunct or contingent (non-permanent) faculty, and only 45 permanent faculty.

At Minnesota, it said, permanent faculty went down 9 percent and adjuncts increased 223 percent in the 2010-12 period.

Running a big university is hard work that demands coping with faculty egos, student hormones, parental nagging, and donor fatigue. But the skyrocketing pay at some schools seems more similar to that at corporations, where CEO pay often has more to do with friendly boards than with actual performance.

And a winning football team sure helps.

It seems a clear-cut cause for a taxpayer revolution. Except that, as we’ve noted before, tax-payers have pretty much stopped paying for these big state schools. As state aid to these schools shrink, these institutions rely ever more on contracts with corporations, on philanthropic giving—and on student debt.

Thursday, May 15, 2014

Inequality, a growing social and political issue in the United States, has become particularly acute in the industrial Middle West.

This makes sense, considering the transformation of the industrial economy that once supported millions of middle-class jobs across the region. But new statistics show that this perception is reality, with inequality growing particularly fast in such states as Illinois, Ohio, and Michigan.

The statistics come from the Martin Prosperity Institute (MPI), the Toronto-based home of urbanologist Richard Florida, and they appear in one of the articles that Florida writes regularly for The Atlantic Cities website. The site, and Florida’s thoughts, contain some of the most useful writing on urban issues today.

Much of the growing inequality in the Midwest can be blamed on the usual suspects—the rich are getting richer, the poor are getting poorer, the 1 percent is outpacing the 99 percent, the uneducated are out of luck, and the middle class is vanishing. All this is true, the MPI says, but it’s pretty much true everywhere. So they ask: why is inequality growing faster in some places than in others?

Tuesday, May 06, 2014

It’s no news that the American news business is in flux and in trouble. The powerful newspapers and giant networks that dominated journalism in the last half of the 20th century have fragmented into shards of new media, blogs, social media, and websites seemingly tailored for every possible taste.

The journalistic past is all but dead, but the future is barely glimpsed. Technology drives this transformation, and the technology itself evolves daily. What’s left are two huge questions:

Thursday, May 01, 2014

Once upon a recent time, most of what we read appeared in our local newspapers, or maybe the Time magazine we bought at the corner drugstore. Now the web delivers a daily blizzard of articles, op-eds, blogs, think pieces, and other journalism. One blog leads to another. Friends send email with interesting links. Every day, I read something new and think, “Gee, everybody should read this.”

So, in lieu of a blog this week, here’s a reading list of recent items that caught my eye. Most deal with the economy, or jobs, or globalization. Some are Midwestern, others national. Each deserves a few minutes of your time.

(And if you've got some suggestions of your own, please let us hear about them.)

John McCarron, Chicago Tribune, on Wandering CorporationsJohn McCarron, the Chicago journalist and teacher, writes on The Great Vamoose of so-called American corporations, like Walgreen's, exploring moves to overseas tax havens to save their shareholders a few bucks, and never mind the damage to the country where they were born and grew.

William Galston, The Wall Street Journal, on Jobs for Young People William Galston, a senior fellow at Brookings, wrote in The Wall Street Journal on what this economy is doing to young people who just want a good job, and why so many educated young adults have fetched up as baristas.

Two Pieces on the Middle ClassOnce the US had the world’s largest middle class. We even had the world wealthiest poor people. No longer. A New York Times article reported the news, and Thomas Edsall, one of our best economics journalists, gives one reason why.

Harold Meyerson and Thomas Edsall on Liberal CitiesAmerican Prospect magazine has a piece by its editor-at-large, Harold Meyerson, on how liberal mayors in some cities—not only New York City but Minneapolis, Pittsburgh, Seattle, and Boston—are following new policies to close the income and wealth gaps between the classes in their towns. It’s an intriguing idea but Edsall, once again, has his doubts.

Brookings on Technology and Cities One new wrinkle is the use of technology and big data to deal with the problems of cities. Brookings did a seminar on this and came up with some thoughts.

The Economist and Bloomberg on Technology and JobsSome other articles look at the impact of technology on our standard of living with a more skeptical eye. These include The Economist magazine, usually a drum-beater for open markets and technology, and Bloomberghere and here.

Chicago Tribune on the Image of CitiesWhen it comes to polishing an image and drawing in foreign investment, some unlikely places could teach Midwestern cities, such as Chicago, a thing or so. So says Alex Rodriguez in the Chicago Tribune, after a visit to Bogota.

The Buzz About PikettyHave you read Capital in the 21st Century, that Thomas Piketty book yet? If not, you’ll have to wait a while. Harvard Press, to its delighted amazement, has a blockbuster on its hands, and is scurrying around to print more copies—a lot more copies—than it had planned. In the meantime, Amazon says it’s out of stock and my local Barnes and Noble says it won’t have any copies for at least a week. In the meantime, there have been some rapturous reviews: a review by Branko Milanovic at the World Bank. Or by the excellent John Cassidy in The New Yorker. Or Paul Krugman’s review from The New York Review of Books.

There will be dissidents a-plenty on this, mostly the classical economists whom Piketty scorns, but most of them have yet to chime in. Tyler Cowan is one of the first, but even he admits that Piketty’s book is a landmark event.

The Global Midwest Initiative of The Chicago Council on Global Affairs is a regional effort to promote interstate dialogue and to serve as a resource for those interested in the Midwest's ability to navigate today's global landscape.